Natural Rubber Economic Cooperation in Southeast Asia: Can it be a ‘building block’ for ASEAN?

Tlogo Rubber Plantation - Salatiga (Java - Indonesia)

Kiki Verico, Faculty of Economics University of Indonesia

One of the key products in Southeast Asia’s agriculture sector is rubber. This product is important and strategic for Southeast Asia hence it has been included among the top eleven priority products of the ASEAN Economic Community (AEC) 2015. It has been expected to be the engine of growth for Southeast Asia’s economy and the powerhouse to transform the ASEAN economic integration paths from free flows of goods to free flows of capital. The latter is identified from its ability to enhance trade and investment integration among the ASEAN members.

Can natural rubber economic cooperation in Southeast Asia be a building block for ASEAN?

My calculation using static comparative advantage of RCA (Revealed Comparative Advantage) and competitive advantage of CMSA (Constant Market Share Analysis) shows that most of Southeast Asia countries have both the comparative and competitive advantage in the primary sector of agriculture products.

Some of the ASEAN members, Thailand, Indonesia and Malaysia are the world’s top three producing countries of natural rubber upon which in the last 25 years, they control more than 65 percent of global natural rubber production. Comparing ten years before the Asian economic crisis (1988-1997) and ten years after this (2002-2011), these three countries demonstrated an increase in productivity of natural rubber (Hg/Ha) with particularly two of them (Thailand and Indonesia) preserved an increase in their harvested area (Ha).

In 2001, these countries established an organization named the International Tripartite Rubber Organization (ITRO). For Southeast Asia, this organization can be classified as a sub-regional economic cooperation while the regional one is ASEAN.

ITRO is the only producing country organization in Southeast Asia that manages both the supply-side (production) and demand side (trade) of an agricultural product. It rules the production-side with the Supply Management Scheme (SMS) and trading-side with the Agreed Export Tonnage Scheme (AETS) policy.

This brings us back to the early years of the European Union (EU) with its ECSC (European Coal and Steel Community), one of the EU’s great forerunner ‘building block’ organizations that successfully nurtured a solid regional economic foundation for the EU.

This analysis attempts to answer this using the general hypothesis: ‘the higher the market power of ITRO, the higher is her ability to cultivate ASEAN’s economic integration’.

It utilizes four different approaches.

First is the macroeconomic model of panel data of which ITRO’s year of the establishment (2001) is set as the time-dummy variable. In addition to it, this analysis also adopts some behavioral variables to complete the model.

The result demonstrated that ITRO remains unable to attract FDI inflows of rubber. In other words, its market power is inadequate to cultivate economic integration in ASEAN as well as to transform her from intra trade integration to intra trade and investment integration.

The model also estimated (1) the positive impact of quantity of natural rubber on FDI inflows of rubber and (2) negative impact of price of natural rubber on FDI inflows of rubber. Both results confirmed the quantity-led FDI inflow of rubber of which natural rubber is more likely in a competitive market with a low producers’ market power than in collusive market.

Second, this analysis utilizes the Cournot-Nash Equilibrium (CNE) model to further perceive whether the global market of natural rubber is in collusive or in competitive market. This method indicated that after year 2001, the quantity of world’s natural rubber trade is frequently higher than its CNE. This supports the previous results that natural rubber is more likely in a competitive market that turning it to be less attractive for FDI inflows.

Third is reference survey to verify what has actually happened in the natural rubber market. This survey supported the previous findings that natural rubber is in competitive market. Yet, both the CNE and reference survey did not prove whether the market dealt with the excess supply or not. This lack requires a country-level input-output simulation and this analysis takes Indonesia as a case study.

Hence, fourth, this analysis conducted an input-output simulation for Indonesia’s case and found that (1) rubber is a forward-oriented product at which other sectors needs rubber for their production input more than rubber needs other sectors for its production input and (2) Its Backward Linkage (as proxy to supply-side) increased while its Forward Linkage (as proxy to demand-side) decreased prior to the establishment of ITRO and afterwards. These results proved the existence of the excess supply of rubber that has caused its price and quantity to decrease and worsen the economic multipliers of profit, ratio of wage to salary, and indirect tax.

All of these four different approaches show that natural rubber is in a competitive market. It did not happen to generate a collusive market with high producer market power. This indirectly indicates the insufficiency of ITRO in taking the important role of nurturing a solid sub-regional cooperation as well as shows her inability to become a ‘building block’ for ASEAN.

*Kiki Verico is Co-Editor of Journal of Economics and Finance in Indonesia (EFI) published by the Institute for Economic and Social Research Faculty of Economics University of Indonesia (LPEM FEUI), currently living in Canberra. He completed his PhD in International Studies (Economics) at Graduate School of Asia-Pacific Studies (GSAPS) at Waseda University. 

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Filed under Agriculture, ASEAN, Economic Integration, Methodology, Trade

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